MUMBAI: The rupee dropped to a record low beyond 52 per dollar on Tuesday, undermined by a slump in the stock market to its lowest close in more than three years as investors became more risk averse. Dealers said sporadic dollar selling by the central bank via state-run banks stemmed the decline, but analysts predicted more weakness for the friendless local unit in the coming weeks.

The partially convertible rupee ended at 51.95/97 per dollar, 0.11 percent below Monday’s close of 51.90/92, after hitting a lifetime low of 52.20 per dollar in afternoon trade.

It has fallen 2 percent so far this week and is down 6.7 percent so far in 2009. It fell more than 19 percent last year.

“There are only outflows in the market and dollar buying is coming from all quarters, be it companies, importers, banks,” said P.V. Rao, head of currency trading at IndusInd Bank in Mumbai.

Capital outflows from the stock market have been a key driver for the rupee’s plunge. The stock index has lost 12.65 percent this year after more than halving in 2008.

Foreigners have sold about $1.8 billion worth of Indian shares so far in 2009, after withdrawing more than $13 billion in 2008, when the rupee fell 19.1 percent.

Traders said the rupee’s sharp fall from 49 to 52 per dollar in two weeks had blown out option trades, forcing some banks to cover their positions, and arbitrage plays between onshore and offshore derivative markets have only added to the rupee’s woes. One-month offshore non-deliverable forward contracts were quoting at 52.29/52.39, weaker than the local spot.

A Reuters poll of 10 traders predicted the rupee may fall further in coming months, but is expected to steady by mid-2009.

Goldman Sachs expects the rupee to remain weak over the next three months due to factors including dollar strength, worsening economic data, weak sentiment due to a high fiscal deficit and a recent downgrade in India’s rating outlook by Standard & Poor’s.

source: Economictimes

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